The pension funded status of the largest corporate sponsors in the United States dropped in 2014 as falling interest rates and the impact of new mortality tables partially offset strong returns on pension plan assets.
Towers Watson says the aggregate pension funded status is estimated to be 80% at the end of 2014, a decline from 89% at the end of 2013.
The analysis also finds that the pension deficit increased to US$343 billion at the end of 2014, more than twice the deficit at the end of 2013, as overall pension plan funding weakened by US$181 billion last year.
“Despite a rising stock market in 2014, funding levels for employer-sponsored pension plans dropped back to what we experienced just after the financial crisis,” says Alan Glickstein, a senior retirement consultant at Towers Watson.
“A one-time strengthening of mortality assumptions alone is responsible for about 40% of the increased deficit, he adds. “We also found that plan sponsors that used liability-driven investing strategies in 2014 had better results, as the declining discount rates were matched with very strong returns for long corporate and Treasury bonds.”
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Pension plan assets increased by an estimated 3% in 2014, from US$1.36 trillion at the end of 2013 to an estimated $1.4 trillion at the end of last year, reflecting an underlying investment return of about 9%. The analysis also finds that investment returns varied significantly by asset class. Large-cap U.S. equities were up roughly 14%, while international equities declined by nearly 5%.
The Towers Watson analysis estimates that companies contributed US$30 billion to their pension plans in 2014 — 29% less than in 2013 and the lowest level of contributions since 2008. Contributions have declined steadily recently partly due to legislated funding relief.
“Given the change in funded status, we expect many plan sponsors will need to reevaluate their retirement plan strategies in 2015,” says Dave Suchsland, a senior retirement consultant at Towers Watson.
Last year’s results surrendered most of the funded status gains earned in 2013, he notes. “This year will most likely bring higher expense charges and unless there is an uptick in interest rates or equity market performance, eventually additional contribution requirements.”
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